Quote:
I claim that since the earliest days of modern banking dating back to the late 17th Century in Britain (and possibly earlier), banks and governments have engaged in three forms of what I call "legalized fraud." They are:
1. Banks lending money that does not belong to the banks
2. Banks lending money long-term using short-term funds
3. Governments and banks issuing currency backed by nothing but debt and false promises
I maintain that these three forms of "legalized fraud," so-called because they are fraudulent in nature but are considered legal, ethical activity by government authorities, may be found in various combinations at the root of every financial crisis experienced in United States history, as well as nearly all of the financial crises experienced abroad in other countries around the world. If we make these forms of fraud illegal, we will go a long, long way toward eliminating systemic financial crises for present and future generations.
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How about adding fractional reserve banking to the mix? In Canada and the United States, banks are required to have only a fraction of what they lend out backed by actual deposits. This means banks can actually create money out of thin air simply by generating a ledger entry.
The US Federal Reserve (or the Bank of Canada) then funds the loans the banks make and the money supply is increased. As the loan is paid, the banks receive the loan payments, take their cut and either lend out more money from these returning funds, or send them back to the reserve bank.
What this means in practical terms is that banks can make loans with little financial downside, if any.
I agree with your contention that the sub-prime mortgage crisis is part of the problem, but not the entire cause of the problems that the US economy is facing.
I would say that decades of sending jobs offshore and the ensuing decline in research and development plays a much bigger role. You can't run an economy on consumer debt and a service sector alone. You still have to produce something tangible.
Looking forward to seeing the publication of your book. Looks like an interesting read.